Tech Mergers Enter Bear Market

Minus Microsoft's mammoth bid for Yahoo, tech mergers and acquisitions activity was down nearly 50% in the first quarter.

Take away Microsoft's $42 billion bid for Yahoo and the merger and acquisition market took a significant dive in the first quarter, a trend that likely portends more bad news ahead, according to a new report by The 451 Group.

Even with Microsoft's mammoth bid included, M&As (mergers and acquisitions) in the first quarter hit an overall $92 billion mark, down slightly from the $100 billion a year ago. Without the Microsoft bid, M&As slumped to $52 billion.

"At the very least, a number of problems have emerged in the first three months of 2008 that will likely come into sharper relief later in the year, including the slumping public market, the increasing concentration of buyers and the utter disappearance of private equity firms," said Brenon Daly, a financial Analyst with The 451 Group and author of the report.

Overall, the number of deals completed in the first quarter worth $1 billion or more fell to 11 transactions, compared to 20 deals closed in the first quarter of last year. The trend is not limited to just large deals, either. The total number of deals announced in the first quarter dropped by about 25 percent to 778 transactions, the lowest level in three years.

"Bottom line: there just aren't enough buyers," Daly said. "The public markets are sellers, not buyers. There's been an incredible drop off in private equity investments."

Tech's Trouble Rooted in the Sub-Prime Mortgage Crisis

Daly said the slowdown began last summer with the housing market crisis. "The whole tornado started then and moved on to other credit markets, including the hedge markets and private equity," he said. "It's a very tough environment to go a board and make a marquee acquisition."

Daly noted that since the subprime mortgage crisis began, the tech industry has suffered three consecutive quarters with just a handful of leveraged buyouts. The overall value of first quarter buyouts was $5.6 billion, less than half the level of 2007.

"In fact, in some ways, LBO [leveraged buyout] activity in the quarter is best characterized by buyouts going bust, whether it was Bain Capital's bid for 3Com getting snagged on national security concerns or the parties in Clear Channel Communications' LBO ending up in court, pointing fingers at one another," Daly wrote in his report.

The IPO market looks equally bleak. Only a single tech company-ArcSight-went public in the first quarter. "With investors turning their backs on shares of tried-and-tested companies, what chance did a new issue have in this market?" Daly asked.

Daly predicted more of the same.

"Most definitely, no doubt about it," he said. "The fourth quarter wasn't all that bad but then the lagging effect [of the subprime mortgage crisis] kicked in. The business side is now influencing the M&A side. You just can't go to a board right now and get a deal done.